Gloom in industry prompts CBI to cut growth forecast

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The Independent Online

The confederation of British Industry yesterday slashed its forecast for manufacturing growth as its latest survey revealed industry had turned pessimistic for the first time in nine months.

The confederation of British Industry yesterday slashed its forecast for manufacturing growth as its latest survey revealed industry had turned pessimistic for the first time in nine months.

Output will grow just 0.5 per cent this year, the CBI said in a massive revision from its February forecast of 2.6 per cent. It also shaved 0.1 per cent off its forecast for GDP growth, which it now believes will come in at 3 per cent. It said there was a risk that the final figure could be even lower.

The continued strength of sterling against the euro - even despite the recent falls - will keep export growth weak, it said. Yesterday the pound hit a fresh six-year low of $1.4676 against the dollar. Against the euro it fell to a two-month low of 61.89p.

Kate Barker, CBI chief economist, said: "The strength of sterling is forcing manufacturers to cut back further on investment plans and if investment declines as we expect, this could constrain growth over the long term."

She said robust consumer spending would offset the weakness of manufacturing. This is diametrically opposed to Wednesday's official first-quarter GDP data that showed a sharp fall in domestic demand and a surprising solid export performance. The CBI's quarterly economic forecast said inflation would stay below the Government's target. Interest rates would peak at 6.25 per cent and remain there during 2001 - an upward revision from its February forecast of a fall-back to 5.75 per cent

The CBI's monthly industrial trends survey, also published yesterday, showed that manufacturers' expectations for output were negative for the first time since last July.

The gloom was compounded by a significant fall in export orders to the worst level since last August. But the picture was confused by an improvement in total orders which, while still below normal levels, were at their strongest for more than two years.

The CBI said this was "at variance" with the rest of the survey and pointed to continuing falls in prices. Sudhir Junankar, a senior CBI economist, said: "Price competition is intensifying, forcing firms to hold prices or reduce them to boost orders in the home market."

Dharshini David, a UK economist at HSBC, said industry was in "real danger of being tipped back into recession within a matter of months". But Adam Law, of Barclays Capital, said: "Output expectations seem too pessimistic, given the strength of domestic demand."

A separate survey said the economy would slow in the second half of the year but not go into reverse. Research firm, NTC, said its indicator - a mix from a series of data - fell for the fourth month running.

The Government, in its annual review, renewed the Bank of England's remit to hit an underlying inflation target of 2.5 per cent, despite pressure to change the terms of reference to take account of the exchange rate. The Bank's remit is "firstly to maintain price stability and, subject to that, to support the economic policy of the Government, including its objectives for growth and employment," it said.

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